If you read your auto insurance policy, you’ll likely come across some unfamiliar terms and confusing legal language. What’s the difference between liability coverages? What counts as underinsured? How comprehensive is comprehensive?
An accident is not the time to find out you don’t have the coverage you need or don’t have enough. If you cause substantial injuries to another driver and you don’t have enough insurance to cover their medical bills and other damages, that driver could feasibly go after your savings and other personal assets.
So whether you’re shopping for a new policy or just want to understand what you have, here are nine auto insurance terms you need to know.
Collision coverage covers losses caused by a collision. Makes sense, doesn’t it? If you accidentally hit another driver from behind and damage your car’s front end, your collision coverage would cover repairs.
If you’re in an accident where the other driver is at fault, you can file a claim against his or her insurance company to repair or total your vehicle, or you can file a claim with your own insurer.
Comprehensive coverage protects you if anything other than a collision damages your vehicle. This includes theft, vandalism and natural disasters.
If your claim escalates to a lawsuit, your lawyer will argue for “damages.” Damages equate to monetary compensation. Depending on the circumstances, damages could include medical bills, lost wages, pain and suffering and disfigurement.
The deductible is how much you pay out-of-pocket when something happens to your car. In most cases, if you have collision coverage with a $500 deductible, you pay $500 for car repairs and your insurer covers the rest. The higher the deductible, the lower your premium, but the more you pay out-of-pocket if you’re in an accident.
Liability generally means legal responsibility. When you cause an accident that causes injury to another person, you may be “liable” for that other person’s “damages.”
Under your insurance policy, you have two types of liability coverage: bodily injury and property damage. Bodily injury liability helps pay medical costs, lost wages and other expenses incurred by others involved in an accident where you’re at fault. Property damage liability covers repairs or replacement of another driver’s car.
In California, you’re required by law to have the following minimum coverage amounts:
• Bodily Injury Liability Coverage: $15,000 per person / $30,000 per accident.
• Property Damage Liability Coverage: $5,000.
• Uninsured Motorist Bodily Injury Coverage: $15,000 per person / $30,000 per accident.
• Uninsured Motorist Property Damage Coverage: $3,500.
6. Medical Payments
Medical payments coverage, aka “Med Pay,” covers your medical expenses when you’re hurt in an accident, regardless of fault.
Depending on your policy, Med Pay can also help pay for funeral expenses, injuries sustained by your passengers or injuries sustained as a cyclist or pedestrian.
You’re not required to buy Med Pay coverage, but we recommend it. For a few dollars a month, Med Pay protects you against exorbitant medical bills. If you have excellent health insurance with little to no deducible, you may not need Med Pay. But if you have a high-deductible health plan, talk to your insurer about it.
Premium is the amount you pay your auto insurer in exchange for coverage. The car you drive, the amount of coverage you purchase, your deductibles and your history of accidents and traffic tickets all affect your premium.
A lot of clients ask me if their insurance rates will go up if they file certain claims. Your rates will not go up when you use your medical payments or UM/UIM coverage. If the accident wasn’t your fault, your rates will not go up.
If a driver has no auto insurance at all, he is uninsured. If a driver without insurance hits you, you would file a claim under your uninsured/underinsured motorist (UM/UIM) coverage.
As mentioned, you’re required to carry at least $15,000 per person or $30,000 per accident in UM/UIM coverage. You can request to reject this coverage, but we advise against it.
If a driver has auto insurance, but it’s not enough to cover your injuries and/or damages, she is underinsured. If an underinsured driver hits you, and that driver only has the required minimum coverage, they likely won’t have enough insurance to cover your medical bills and pain and suffering. That’s when you file a claim under your UM/UIM coverage
Important: make sure your UM/UIM coverage at least equals the amount of your liability coverage; otherwise, you’re protecting others more than you’re protecting yourself.
The first of the year is a good time to review your policy. Talk to your insurer to determine the right amount of coverage to suit your needs.
Photo courtesy of Scarlet Davies, Flickr